The Long-Term Fundamental Case for Gold

"No State shall enter into any Treaty, Alliance, or Confederation; grant
Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make
any Thing but gold and silver Coin a Tender in Payment of Debts; pass any
Bill of Attainder, ex post facto Law, or Law impairing the Obligation of
Contracts, or grant any Title of Nobility." ~ United States Constitution,
Excerpt from Article 1, Section 10 ~

A quick glance at most of the headlines over the weekend and the primary focus
seemed to be either calling a near term top in domestic equity indices or
a focus on the Greek debt situation. Why is anyone even paying attention to
what is going on over there? Until the ISDA declares a default where the underlying
Credit Default Swaps (CDS) are triggered, it is all just noise.

The ECB has broken the rule of law by placing itself as the senior creditor
ahead of private creditors, the Greek government is trying to pass retroactive
legislation to trap private sector creditors holding out of the PSI, and the
leader of Greece was not even elected by the people of Greece - how much more
manipulation and insanity do we need to monitor?

Similar to the price action since 2008, central banks around the world control
everything from financial markets to the ascent of political leaders. These
same political leaders help central bankers and planners control policy and
decision making at the highest government levels in Europe and around the
world. It would seem that the United States should change the motto from "We
the People" to "We the Bankers."

However, there is one particular asset class that even the central bankers
have a hard time controlling. While they can impact short term price action
through direct currency manipulation initiatives, in the longer-term gold
is likely to move in only one direction - higher.

The price action on Tuesday reminded market participants that actions such
as the Greek bailout come at a cost. Quantitative easing and/or printing money
(depending on what one wishes to call the practice of producing fiat currency
out of thin air) has a direct impact on the price of gold.

Many financial pundits argue that gold has no utility, but what they fail
to recognize is that gold is the senior currency to all other fiat currencies.
Silver is also a form of currency and is senior to all other fiat currencies
as well. While one can draw the utility of gold into question, the idea that
gold is the senior most currency to all other fiat currencies is not new.

The Constitution of the United States of America, which is over 200 years
old, refers to gold and silver as forms of payment. Looking back thousands
of years the Romans used gold coins as a form of currency. The idea that gold
and silver are currencies is certainly not a grandiose thought or a stretch
of historical concept. Trying to depict gold as a worthless asset depends
on your view and consideration of fiat currency.

There are those that would argue that the Federal Reserve of the United States
is not actively manipulating economic conditions domestically or abroad. For
those that view gold as a poor investment or hedge against currency devaluation
need to consider the charts illustrated below. The chart below was produced
by Thomas Gresham of Gresham's Law.

Total Asset Growth of the Federal Reserve System - 1915 - 2012

It is rather obvious by looking at this chart that the Federal Reserve has
actively sought to enter domestic and foreign financial markets. The surge
in balance sheet assets serves to prove how far the Federal Reserve Bank is
willing to go to maintain markets which seemingly are only allowed to move
higher over time.

This chart is bearish for nearly any form of paper backed assets. The above
referenced chart is long-term bearish for the Dollar and Treasuries and long-term
bullish for physical gold and silver. As the Federal Reserve continues to
debase the U.S. Dollar in concert with other central banks' monetary easing
programs, gold and silver prices over time are destined to move higher in
virtually every form of fiat currency.

During the same time frame that the Federal Reserve has seen its balance sheet
grow exponentially, the rapid rise of M2 money supply is staggering. The long
term chart of M2 is compared to gold futures in the charts presented below.

M2 Money Stock

Gold Futures Monthly Chart

It is rather obvious what has happened to the price of gold as the M2 money
supply has grown. The idea that the Federal Reserve has not already destroyed
a significant amount of the purchasing power of the Dollar can easily be refuted
by the two charts shown above.

In the short-term, gold and silver could suffer from a pullback, but in the
intermediate to longer term it is unlikely that we have seen the highs of
this bull market for either metal. As long as central banks around the world
continue to print money and expand their balance sheets gold and silver will
remain in a long-term bull market. The daily chart of gold futures is presented
below.

Gold Futures Daily Chart

As can be seen above, it is not out of the question that we could see gold
pullback to test one of the key moving averages in coming days/weeks. However,
I expect the key support area to hold in the event of a sharp selloff. Ultimately,
I expect to see a breakout over the resistance zone in the days/weeks ahead.
However, I would not be surprised to see gold consolidate or work marginally
lower from current prices before breaking out to the upside. Right now the
primary threat in this fledgling gold rally is a short-term spike higher in
the U.S. Dollar. The primary catalyst which could drive a flight to the Dollar
involves the sovereign debt situation in Greece and the Eurozone as a whole.

While the short-term price action may be bearish, the intermediate to longer
term time frames are quite bullish for metals as central banks will continue
to race to debase their currencies. Quantitative easing in the U.S. and around
the world will become pervasive and gold prices could potentially soar in
value. The data from the Federal Reserve Bank itself suggests that they are
indeed increasing the money supply. As time has passed, the money supply and
gold have seemingly grown in lockstep with one another. Surely inquiring minds
do not consider this mutual relationship between gold and the money supply
to be purely coincidental.

As further evidence that the Federal Reserve continues to use quantitative
easing to manipulate asset prices through direct entry into financial markets,
a chart of the velocity of M2 clearly depicts that the velocity of money is
declining. I am not an expert regarding macroeconomic data, but if the velocity
of money is declining to 1960's levels would it be a stretch to say that we
may be going through a period of stagflation? The chart below illustrates
the Velocity of M2 Money Stock courtesy of the St. Louis Federal Reserve Bank.

Velocity of M2 Money Stock

For those unfamiliar with the term velocity of money, it is simply the rate
of turnover in the overall money supply. The velocity of M2 is expressed as
the number of times that a Dollar is used to purchase final goods or services
which are included in the total gross domestic product.

Conclusion

The short term technical picture in gold is a bit suspect due to overhead
resistance and recent U.S. Dollar strength. However, the longer term macro
factors that impact the value of the U.S. Dollar and precious metals are all
telling us the same thing.

As time wears on and central banks do even more to prop up the broader economy
and failing financial institutions, it is without question in my mind that
gold and silver will both benefit handsomely from these decisions being made
by central bankers from around the world.

Ultimately, I am very bullish of gold and silver in the intermediate to longer-term,
but in the immediate short-term frame gold could consolidate or pullback before
breaking out to the upside.

Chris Vermeulen, founder of AlgoTrades Systems., is an internationally recognized
market technical analyst and trader. Involved in the markets since 1997.

Chris' mission is to help his clients boost their investment performance while
reducing market exposure and portfolio volatility.

Chris is also the founder of TheGoldAndOilGuy.com, a financial education and
investment newsletter service. Chris is responsible for market research and
trade alerts for of its newsletter publication.

Through years of research, trading and helping thousands of individual investors
around the world. He designed an automated algorithmic trading system for the
S&P 500 index which solves his client's biggest problem related to investing
in the stock market: the ability to profit in both a rising and falling market.

AlgoTrades' automated trading systems allows
individuals to investing using either exchange traded funds or the ES mini
futures contracts. It is supported by many leading brokerage firms including:

He is the author of the popular book "Technical
Trading Mastery - 7 Steps To Win With Logic." He has also been featured
on the cover of AmalgaTrader Magazine, Futures Magazine, Gold-Eagle, Safe
Haven,The Street, Kitco, Financial Sense, Dick Davis Investment Digest and
dozens of other financial websites. His list of personal and professional
relationships approaches 25,000, people with whom he connects and shares
is market insight with out of his passion for trading.

Chris is a graduate of Seneca College where he specialized in business operations
management.

Chris enjoys boating, kiteboarding, mountain biking, fishing and has his ultralight
pilots license. He resides in the Toronto area with his wife Kristen and two
children.

J.W. Jones is an independent options trader using multiple forms of analysis
to guide his option trading strategies. Jones has an extensive background
in portfolio analysis and analytics as well as risk analysis. J.W. strives
to help traders that are missing opportunities trading options. He also commits
to writing content which is not only educational, but entertaining as well.
Regular readers will develop the knowledge and skills to trade options competently
over time. Jones focuses on writing spreads in situations where risk is clearly
defined and high potential returns can be realized.

This material should not be considered investment advice. J.W. Jones is not
a registered investment advisor. Under no circumstances should any content
from this article or the OptionsTradingSignals.com website be used or interpreted
as a recommendation to buy or sell any type of security or commodity contract.
This material is not a solicitation for a trading approach to financial markets.
Any investment decisions must in all cases be made by the reader or by his
or her registered investment advisor. This information is for educational
purposes only.